U.S. stocks are trying hard to rally amid mixed signals from earnings reports — and may end with the third losing week in a row.
It’s the middle of earnings season, which is when major U.S. companies report their profits or losses from Q1. So far, it’s been a mixed bag. Netflix stock is down over 35% this week after a bombshell report revealed a drop in subscribers for the first time since 2011, while United Airlines and American Airlines are looking forward to big gains as summer travel makes a comeback.
Comments from Federal Reserve Chairman Jerome Powell have investors expecting a 0.5% interest rate hike next month. That would raise the cost to borrow money. Investors typically don’t like to see increases because it slows down consumer spending and lowers stock prices. However, the Fed’s concerns are fighting runaway inflation and rising costs for basic goods.
Here’s what it means for investors:
- The biggest shock this week is the rapid decline of Netflix stock due to 200,000 lost subscribers globally in Q1. The 35% drop instantly wiped out $50 billion of the company’s value. Even worse, the company is forecast to lose 2 million more subscribers this quarter. Other streaming stocks, including Disney+, Paramount+, and Spotify also lost value. But people aren’t entirely over streaming entertainment. HBO and HBO Max reported 3 million new subscribers in Q1. Content truly is king. But don’t let this news scare you. If you have an investment portfolio that is well-diversified, news like Netflix tanking shouldn’t affect you. Instead, stay the course and keep investing.
- This earnings season, Tesla stock is up, along with Snap (which owns Snapchat), United Airlines, American Airlines, and other travel providers. In particular, Tesla reported $18.76 billion in revenue, driven by increases in deliveries and sales prices – and is up 87% from the same time last year. But earnings season isn’t over and anything could happen. April is usually a good, winning month for the stock market, but with Fed interest rate increases and geopolitical tension about the war in Ukraine, it wouldn’t be surprising if this April is an anomaly. Heavy hitters American Express and Verizon are due to report Friday to close out the week.
- Speaking of the Fed, Chairman Powell commented that federal officials “are committed to using our tools to get 2% inflation back,” in reference to interest rate hikes to tame the rising costs of everything from food and energy to raw materials and housing. “It’s absolutely essential to restore price stability,” Powell said. He also noted the U.S. economy is otherwise very strong. Based on this week’s performance, it seems that the market has already priced in those comments, but investors should keep a close eye on interest rates, as they will undoubtedly have an effect on market performance in the coming weeks. The U.S. central bank’s next meeting to approve rate increases is May 3 and 4.
The stock market’s performance changes every day in response to a variety of events, both nationally and globally. Investors, and therefore stock prices, respond quickly to news, and there’s a lot going on. Everything from the war in Ukraine to COVID-19 variants to runaway inflation have spooked investors in recent weeks. That said, there’s much to look forward to in a rapidly changing market. The biggest trackable upcoming event is the planned interest rate hikes starting next month, which affect investors because they siphon interest toward government-backed securities and Treasury funds, and tend to discourage consumer borrowing and spending, which lowers overall market performance.
The market looks forward and reacts fast. As an investor, you should look forward, too — but instead of reacting, the best response is to stay the course and keep investing.
How Investors Should Deal With Stock Market Volatility
For new investors, big swings in the market can be a lot to handle. Take Netflix for example. If you’re a long-term investor, volatility like this shouldn’t bother you. Slow and steady wins the race. Keep your “buy-and-hold” investing mentality and invest with low-cost, broad-market index funds. The best performing portfolios are ones that are diversified and have the most time in the market.
If you are investing in index funds that track the S&P 500, you already have Netflix in your portfolio. The great thing about index funds is that they are diversified, meaning your money is spread out among hundreds, if not thousands of companies. So if one company tanks, like Netflix, your money isn’t totally gone.
Pro Tip
Instead of just investing in Netflix stocks, put your money in an index fund that tracks the S&P 500. You’ll get a piece of the company, but without the volatility. Remember to stay the course because investing is long term.
“The most important thing is to always remember what you’re investing for,” says Thomas Muñoz, associate financial life advisor at Telemus, a financial advisory firm. “Short-term volatility is obviously something people should be aware of. But if you have a long-term time horizon, historically the stock market goes up. And when that’s the case, it’s important to have the discipline to keep dollar-cost averaging your [investments].”
Dollar cost averaging spreads out your deposits over time, and has demonstrated that it performs better “during a period of high market crashes,” says according to Rebecka Zavaleta, creator of the investing community First Milli.
Whatever you do, invest early and often, especially if you have a long investment timeline. Dips and crashes will happen, and so will other scary-sounding things like economic bubbles, bear markets, corrections, death crosses, and recessions.
You can even take advantage of a dip to invest more, but not if it impacts your regular investing schedule, Muñoz advises. It’s hard to tell when there’s going to be a dip or correction, and “not even the best investors in history can time the market.” The best advice is to stick to your plan and keep investing.
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